Did you know that more than 70% of all taxes collected in the US come from payroll taxes?
So it is no surprise that the IRS and the Department of Justice (DOJ) take payroll taxes very seriously and make payroll tax enforcement their number one priority.
Yet, it can be tempting for small business owners to use the withheld payroll tax money to fund their business activities, support their company during a rough time or simply fuel a luxury lifestyle and delay the payment to later. After all, they’re in charge of withholding this money on employees’ wages and can easily spend it instead of holding it in trust to pay the IRS in due time.
The issue is that payroll tax debt can quickly escalate, with interest and penalties accumulating over time and significantly adding to the original payable amount.
Unfortunately, payroll tax debt is one of the main reasons small businesses face legal trouble.
So, to prevent you from experiencing legal issues regarding your payroll taxes, we’ve put together this guide. We’ll first define what payroll taxes are exactly and explain how to easily pay your payroll taxes before highlighting unpaid payroll tax penalties. And, of course, we’ll share the best way to solve your current payroll tax issues and prevent payroll tax troubles in the future.
What are Payroll Taxes?
Payroll taxes include taxes employers and employees must pay on salaries, wages, commissions, and tips.
Payroll taxes paid by employees include the following:
- Federal income tax
- State income tax
- Social security
Payroll taxes paid by employers include the following:
- Federal unemployment tax (FUTA tax)
- State unemployment tax (SUTA tax)
- Social security
Social security and medicare taxes (known as FICA) are grouped together and equal 7.65% of an employee’s wages or salary. As mentioned, they have to be paid both by the employer and the employee.
Payroll taxes are used to fund Social Security, workers’ compensation, healthcare, and other social programs.
How to Pay Payroll Taxes?
For federal taxes, payment must be made electronically through the EFTPS (electronic federal tax payment system). When it comes to state taxes, the payment method varies from state to state, so make sure to check what your state’s preferred payment method is.
Also, your payroll taxes should be reported on Form 941 quarterly. Per the IRS website, Form 941 is due ‘’by the last day of the month following the end of the quarter’’.
Unpaid Payroll Tax Penalties
So, you’re behind with your payroll taxes. You probably need payroll tax relief.
Since June 2019, the IRS has implemented a new approach to payroll tax debt monitoring and collecting by tracing where the payroll tax money went or how it was spent, if you will. If the investigation results show that the money was spent to the owner’s benefit, the owner could be prosecuted and exposed to hefty penalties.
More specifically, if the IRS revenue officer in charge of investigating determines that the money wasn’t reported as income on the owners’ 1040 income tax returns, they have two options. They can either submit the returns to the IRS civil audit division for them to assess the situation further and potentially enforce a 75% civil fraud penalty or submit the case to the IRS Criminal Investigation Division, which could lead to criminal prosecution.
The conclusion is that while you might consider payroll tax debt as a civil issue, it can easily become a criminal tax nightmare and even see you lose your business entirely. Remember, according to the IRS, payroll tax debt represents a theft from your employees.
Here are some of the most common penalties for businesses failing to comply with their payroll duties:
- Failure to file Form 941: businesses failing to file Form 941 (or similar forms) will be subject to a 2% penalty if they’re between one and five days late. The penalty will gradually increase over time. The maximum penalty a business will have to pay is 15% if they’re over ten days late after getting their first IRS notice of tax due.
- Not providing critical information returns to employees, including Forms W-2, can result in penalties for the business.
- Failure to classify independent contractors as employees if they don’t meet the requirements to be classified this way will result in unpaid tax payroll penalties.
- Failure to pay payroll taxes in due time will result in a trust fund recovery penalty.
You’ll find more information on the IRS’s website.
Trust Fund Recovery Penalty
As discussed, as an employer, you’re required to withhold payroll taxes from your employees’ paychecks. These taxes (federal taxes and FICA taxes) are called trust fund taxes because they’re supposed to be held in trust until you make a federal deposit.
A trust fund recovery penalty (or TFRP) will be applied if the IRS can’t immediately collect the unpaid trust fund taxes from you. The penalty usually equals the amount of the taxes withheld. For instance, say you owed $5,000 of payroll taxes. You withheld this money on your employees’ paychecks but misused it. The IRS would require you to pay the $5,000 plus an additional $5,000 penalty.
This example applies to one pay cycle. If you do this for several months, always planning to put the money back next month but never getting around it, by the time the IRS notices you haven’t been paying your payroll taxes, you might owe tens of thousands of dollars, if not more, and be in financial and legal trouble.
How to Solve and Prevent Payroll Tax Trouble?
As a business owner juggling a million tasks at once, it can be hard to keep up with your payroll duties. After all, according to numerous studies, it can take up to 21 days a year for small businesses to calculate and file their payroll taxes!
A tax attorney can assist in prevent tax trouble and certainly can get you out of trouble with payroll tax debt. Using the services of a reputable and experienced tax attorney can save you tens of thousands of dollars and even prevent your business from having to file for bankruptcy.
At Delia Law, we’re on a mission to help small business owners like you streamline their payroll tax process and resolve any IRS-related issues. Whether you’re already behind with your payroll taxes or need help keeping everything in order moving forward, our team of talented tax attorneys can help.
Some of the many things we’ll be able to support you with include the following:
- Minimizing your businesses’ back taxes
- Helping you file unfiled tax returns
- Settling tax debt
- Appealing an IRS decision and more…
We tailor our services to each one of our clients and would love to discuss your needs and see how we can help. So, don’t hesitate to request your free consultation today.